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Publishing Value Chain & Trends 1996 2000
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Transcript of Publishing Value Chain & Trends 1996 2000
Prepared by Michael Cairns – Managing Partner, Information Media Partners
©Information Media Partners
Book Publishing Industry Value Chain and Trends 1996 – 2000
Information Media Partners: Publishing Value Chain and Trends 1996 – 2000
July 15, 1996
Page 2 of 12
Prepared by Michael Cairns – Managing Partner, Information Media Partners
©Information Media Partners
BOOK PUBLISHING - CONTENT DEVELOPMENT
DEVELOPMENT
CONTENT DEVELOPMENT:
Review manuscripts
Review editorial proposals
Identify talent
Review author proposals
(authors, designers,
photographers, lyricists, etc.)
CONTENT ADMINISTRATION:
Negotiate contracts
Determine royalties and
advances
Preliminary financial analysis
Acquire (clear), administer,
and litigate rights
PRODUCE MANUSCRIPTS:
Contract authors, artists
Assign editors
Confirm story, concept, and
timing
Translate manuscripts
MARKETING AND SALES:
Review proposals
Develop preliminary plan and
budget
Develop publishing schedule
PRE-PRODUCTION
EDITORIAL:
Edit manuscript
Accuracy/fact check
Manage author relationship
DESIGN:
Jacket/Cover
Artwork/Photography
Layout/text formatting
PRE-PRODUCTION:
Composition
Equipment, materials and
printing options/costs
MARKETING + PROMOTION:
Sales forecasts
Promotion + Marketing
budgets
Public relations
FINANCIAL SUPPORT:
Title P/L proposal
Capital investment request
Cash management
Pay advance
CONTRACT
ADMINISTRATION:
Administration + litigation of
rights
Content (of editorial product)
review
PRODUCTION
EDITORIAL:
Review editorial and page
layout
Final edits
PRODUCTION/
MANUFACTURING:
Finalize layout
Purchase material (paper)
Confirm timing
Contract with printer
Manage pre-press work
Perform press work
Manage text and cover
printing
Manage binding and packaging
Coordinate warehouse/vendor
delivery
FINANCIAL SUPPORT:
Title P/L accounting
Cost accounting
Cash management
POST PRODUCTION
CONTENT/CONTRACT
ADMINISTRATION:
Contract monitoring and
management
Rights/licensing marketing
Rights inventory management
Litigation of rights violations
FINANCIAL SUPPORT:
Financial reporting
Cost accounting
Royalty accounting
Royalties disbursement
Information Media Partners: Publishing Value Chain and Trends 1996 – 2000
July 15, 1996
Page 3 of 12
Prepared by Michael Cairns – Managing Partner, Information Media Partners
©Information Media Partners
BOOK PUBLISHING - CONTENT DISTRIBUTION
MARKETING
ASSESSMENT
MARKET
EVALUATION:
Competitive review
Substitute potential
Consumer interest
Positioning
Ancillary market
opportunities
Sub-rights & licensing
opportunities
DECISION MAKING:
Release dates
Markets and territories
Distribution channels
Book club and serial
rights
MARKETING PLAN:
Determination of
promotions
Establishment of price
FINANCIAL SUPPORT:
Development of
budgets
MARKETING AND SALES
SALES:
Goal setting
Presentations
Management of field
sales force
Development of sales
support materials
State adoption sales
planning (textbooks)
PROMOTIONS:
Press releases
Author tours
Other media (TV)
Free product
Review copies
Co-op programs
MARKETING:
Product mailings
Catalogue mailings
Telemarketing
Media advertising
Merchandising
DISTRIBUTION
WAREHOUSING:
Manage stock
Monitor returns
Create special packs
Manage inventory
levels
Manage warehouse
Manage computer
systems
DISTRIBUTION:
Manage distributor
relations
Order processing and
customer inquiries
Negotiate shipping
rates
Fulfillment of orders
FINANCIAL SUPPORT:
Cost management
Inventory
management
PERFORMANCE
MEASUREMENT
SALES:
Sales target
management
Sales cost
management
MARKETING:
Title sell-through
analysis
Marketing data
analysis
Advertising and
promotions budgets
FINANCIAL SUPPORT:
Performance versus
forecast
Title P/L accounting
Inventory
management
Royalty accounting
REVENUE COLLECTION
FINANCIAL SUPPORT:
A/R management
Cash management
Depreciation
Write-off analysis
Royalty accounting
Title P/L reporting
Returns analysis
Remainder analysis
Information Media Partners: Publishing Value Chain and Trends 1996 – 2000
July 15, 1996
Page 4 of 12
Prepared by Michael Cairns – Managing Partner, Information Media Partners
©Information Media Partners
BUSINESS SEGMENT OVERVIEW - BOOK PUBLISHING
INTRODUCTION:
The U.S. publishing industry comprises 20,000 publishers; however, there is significant concentration within a very small number of large publishers.
Publishers such as Simon & Schuster (sales:$1.8B), Reader’s Digest ($1.5B), The Thomson Corp. ($1.4B), Random House ($1.3B), McGraw-Hill ($1.2B) Time-
Warner ($1.2B), HarperCollins ($1.1B), Reed Elsevier ($1.0B), Addison Wesley, Penguin (Pearson, Plc) ($1.0B), Bertelsmann Book Group (BDD) ($1.0B),
Harcourt General ($1.0B), Times Mirror ($0.9B) and Scholastic ($0.6B) are significant players in the consumer, educational and scientific and professional
segments, which account for the majority of publishing activity worldwide. These large firms have gained market share primarily through acquisition (over
the past fifteen years) and continue to add properties in a similar manner. (Data: BP Report 11/27/1995).
In the publishing industry, there are three general categories of books: trade, educational and professional/reference. These segments vary significantly in
management processes, costs, and product life cycles. Trade books (adult hardcover and paperback, juvenile hard and paper back) consist of general interest
and mass market consumer books which include fiction, nonfiction, self-help and how-to books. Educational books include elementary through high school
(EL-HI) and college text publishing. Professional/reference publishing includes directory, journal, and professional books. The book industry is estimated to
have annual sales between $18-$20B with the largest segments being trade books ($8-9B), professional ($5-6B) and EL-HI and College ($4-5B). Sales
growth overall from 1993-1994 was 4-5%, however, there were significant increases within the trade segment (10-14%) and in the professional and book
club segments (10%). Decreases were seen in the mail order and EL-HI text segments. (Data: BP Report 1993 - 1994).
CONTENT DEVELOPMENT:
Publishing companies must always search out new content opportunities for books. Content acquisition consists of the transformation of ideas into
manuscripts and the procurement of existing manuscripts under proposal. Content is typically acquired in a number of ways: 1) an agent submits a solicited
or unsolicited manuscript, 2) an unpublished or new author submits a manuscript to a publisher on their own, 3) a publisher purchases the U.S. rights to a
work not published in the U.S. or purchases the rights previously owned by another publisher. The publisher may also purchase the rights to characters to
create a book(s) based on those characters (e.g., Beverly Hills 90210). Lastly, authors under contract (Stephen King) submit book outlines in advance of
finished manuscripts, but on a prearranged schedule.
Advances and royalties paid to authors vary widely depending on the type of book and the bargaining power of the author/agent (for example, some reference
publications don’t pay any royalties or advances to authors, whereas Tom Clancy may get 20% of retail and $1.0MM advance per title). Typically, royalties
paid to authors are 5-15% of the book’s cover price. Rights traditionally have (for the publisher) extended to all media (paper and electronic, market and
channel); however, with the increasing importance of multimedia and “nontraditional” publishing opportunities, authors are withholding these rights from their
agreements in an attempt to sell them individually.
The acquisition process involves the editorial, business analysis, sales and marketing and legal departments and often requires corporate approval. This group
evaluates and develops ideas which eventually become published product. For educational product, there is often a review board comprised of professors and
administrators who act as overseers and add credibility to the project. (The educational review and selling process can often be highly politicized and difficult
to manage). For reference and technical publishing, there occurs an intense peer review cycle which can often last a year or more after submission of the
original manuscript; additionally, it is often necessary to find a reputable editor for the book or publication.
The level of financial detail required for the acquisition review process differs by segment and by publisher. Generally, for consumer publishing, the greater
the amount of money projected to be spent on authors’ advances, royalty minimums and marketing fees will determine the required level of financial detail.
Information Media Partners: Publishing Value Chain and Trends 1996 – 2000
July 15, 1996
Page 5 of 12
Prepared by Michael Cairns – Managing Partner, Information Media Partners
©Information Media Partners
For educational publishing the amount of capital investment is often considered significant (a textbook can cost anywhere from $5.0MM to $20MM).
Development can often last a number of years; therefore a specific set of financial requirements must be met, eventually requiring corporate management
approval. The decision to publish will also take into account the possibility of additional revenues from licensing and sub-rights revenue although these
revenues may be difficult to quantify. At a minimum, all book proposals will be accompanied by summary income statements projecting several years of
revenue and expenses. Sales projections estimated by the sales and marketing department is the critical component of this process as expense information is
generally formulaic.
PRODUCTION PROCESS:
Once a title has been approved, it is assigned to an editor who either works with the existing author or finds an author for the product idea. Once a schedule
has been agreed upon, the author creates the product and submits it per the schedule. Subsequent to this, a series of reviews, edits and rewrites take place
until the manuscript is approved. Editing consists of correcting the text, fact checking and resolving legal issues. It is an iterative process which often allows
for final approval by the author and/or owner of the licensed material being used in the book.
Concurrently, the editor is also working with the production and marketing departments to determine the design of the cover, typefaces and layout of the
book. With consumer fiction, this is fairly straightforward with the only significant design work appearing on the cover of the book. Paper, type and binding
requirements generally do not change a great deal. With a children’s title, if the author is not an artist one is found to create the artwork necessary for the
book to be successful. This, again, can be iterative and will involve the editor, artist and author. With educational titles (textbooks) a great deal of time and
effort is required to determine what art work, graphics and photography to use. Once settled, the editor must clear the rights to use these images in the work
being created; this can take a great deal of time depending on the quantity of material to clear.
Then other pre-production decisions are made, such as type of paper (weight, which determines thickness of each page, and finish, shiny versus matte), color
quality (black and white; two-four-six-color pages), method of printing (offset, roto gravure) and other decisions must be made. These decisions are made by
a committee consisting of the editor and marketing and production personnel. The production manager will negotiate with all vendors on matters pertaining to
the production of the book.
Production of the title involves the scheduling and coordination of activities which produce a book in preparation for distribution. These activities include
ensuring that all materials are available, developing the layout and composition, performing presswork and binding and packaging the book for warehousing
and distribution.
Presswork involves typesetting and printing. The typesetting process entails transforming the editorial product (text and graphics) into a format usable by the
printer, which is then used to create plates for the physical printing of the book. Typesetting used to require melting hot lead to create “molds”; ink was
applied to these “molds” and they were then pressed against paper to create a printed page. Typesetting is now achieved in one of three ways: a) text output
(from a word processing file) is photographed and the resulting film is combined with film of the graphic portion (pictures, images) of the book. The composite
film is then used to make metal plates (by chemical reaction) which are then placed on either a Web offset or Roto-gravure machine (discussed below). B)
Typesetting can also be performed by electronically producing a text file, scanning the graphics into the file and electronically laying out the book using a
typesetting software package such as QuarkXpress. A QuarkXpress file is “printed” on “camera ready” film as a conventional printer would print out on paper.
This obviates the need to print hardcopy (paper) replications of each page of the book in order for each page to be photographed (as in the prior example).
Plates are produced from film as above, which is output directly from the electronic file to a film printer. Lastly, C) new technology is allowing publishers to
skip the film creation process and to go directly from the electronic file to the creation of the printing plates. This is revolutionary and not currently widely
used, but will be within the next 3-5 years.
Information Media Partners: Publishing Value Chain and Trends 1996 – 2000
July 15, 1996
Page 6 of 12
Prepared by Michael Cairns – Managing Partner, Information Media Partners
©Information Media Partners
As mentioned previously, once plates have been created they are attached to either a Web offset printer which prints in sheets (in a series of scissor actions)
or a roto gravure printer which prints on rolls in a continuous flow from start to finish. The amount of color of the book will determine the number of sheets of
film required to produce each page of a book. For example, a “six-color” book will require six different color sheets of film including one text film (black) for
each page of a book. (Only black would be required if there are no color images on a page). The trim size (outside dimensions) of the book or publication will
determine how many pages of each book will appear on each plate. It is critical that the production manager match color pages with color pages in order to
ensure that the amount of color film is minimized. Determining whether a book is B/W, four-color or six-color is a major determinant of the cost of the book
or publication.
Once a book is printed it is ready for binding. How a book is bound will impact how it is laid out and printed. Publications can be saddle stitched (staples are a
form of saddle stitching) or perfect bound. Saddle stitching requires binding “stitched” through the center of the middle page of the publication. The cover of
this type of publication is considered another page and is generally printed at the same time. Typically, only magazines and low page count books are saddle
stitched. Perfect bound books comprise a number of “forms” (whereas saddle stitched books are only one “form”) which are glued together at the spine and
enclosed in a cover that then holds the book together. In this case, the cover is generally printed separately from the rest of the book and usually has
different print requirements (paper, color, etc.).
CONTENT DISTRIBUTION:
Content distribution refers to the process of selling and distributing books from the warehouse through various channels to the public. In total, management
of this function entails inventory management, customer service (order taking and fulfillment, returns processing, order inquiry), the delivery process, product
returns, marketing materials, and often the management of the collection of management information on all products sold by the publisher.
In the early stages of the product development cycle a marketing campaign is developed. As the product is produced, this campaign is implemented and each
campaign varies according to the product segment and revenue expectations. Marketing and promotional activities which are used to generate favorable
publicity for an upcoming product include advertising, trade announcements, posters, review copies, press releases, book signings, author appearances, early
reviews, serialized or excerpted for magazine publication, and cooperative activities between publishers and booksellers such as in-store displays and
prominent shelf space. Publishers are also using their Internet homepages to provide advanced notification of upcoming titles, excerpts, reviews, catalogues,
order information and jacket covers.
The internal support functions that support distribution include: 1) order processing and fulfillment, which receive the orders from customers and initiate the
shipping order and invoice for the customer (customer service and maintenance, telemarketing, international order processing, invoicing, accounts receivable
and product back-list management and inventory management), 2) warehousing and distribution manages the delivery of product to the customer and
manages existing inventory and returns of unsold books (inventory management, warehouse management, freight and traffic management, shipping, bulk
replenishment, material handling kit/custom assembly, returns processing and “kills” management).
Distribution channels vary significantly by book type, with trade books (fiction) sold either to wholesalers (Ingram, Baker and Taylor) or directly to retailers.
Professional/reference titles are generally sold directly to retailers or customers such as professionals, libraries and schools. Some publishers do not distribute
their own books; rather, they contract with a national distributor for the exclusive right to distribute their products. All the major publishers distribute titles
which they do not publish. Contracts for distribution rights also include promotion and sales support from the distributing company. Rates charged for this
service range from 5% - 25% of net receipts. Publishers also sell through direct mail, book clubs and subscription sales. Publishers sell their books to a buyer
at a percentage “off the retail price.” Sales to the national wholesalers are typically made at 55%-65% off retail. Sales to catalogue or book club purchasers
are made at 40%-75% off retail. Sales directly to retailers are made at rates ranging from 45%-55% off retail. All discounts are variable and depend on
quantities ordered, the channel and if the product can be returned to the publishers for credit.
Information Media Partners: Publishing Value Chain and Trends 1996 – 2000
July 15, 1996
Page 7 of 12
Prepared by Michael Cairns – Managing Partner, Information Media Partners
©Information Media Partners
Unsold hardcover titles are returned for credit to the publishers and are either resold or “remaindered” (written down and sold, for a little as 5% of retail, in
bulk to remainder wholesalers who sell them to retailers). Paperbacks are returned by sending in the torn covers for credit.
Given the consolidation in the publishing industry over the past 15 years, the largest publishing houses have rationalized their distribution processes and many
distribution centers have closed as operations have been consolidated. Significant process and automation changes have not as yet taken place; however, it
remains likely that these operations will be reengineered during the short term. Innovative ways of distributing product have been in short supply; however,
some publishers such as McGraw-Hill have experimented with on-demand educational publishing, allowing professors to select chapters of textbooks and have
the entire book “printed” in college bookstores on short runs. In the two years since this service was introduced, this program has been very successful; the
cost to the purchasers is no more than the cost of a regular text book.
SALES AND MARKETING:
While the production process and distribution processes across the three major segments (trade, education, professional) remain consistent, there are
significant differences in the marketing and sales activities of publishing professionals in each of these publishing areas.
Marketing and sales in the trade segment concentrates on sales force management and incentives, promotions (corporate and co-op) and other programs
(movie tie-ins, etc.). The large publishers all have sales forces which sell the publisher’s books and (in virtually all cases) the products of the publishers for
whom they distribute titles. Smaller publishers have small marketing and sales staffs but no field sales staff. The functions of the field sales forces are either
part of their distribution agreement or they contract with a regional/national rep firm who sells a number of publisher titles. At the larger publishers, the sales
and marketing departments are organized by channel: independent bookstores (Shakespeare & Co), small/large chains (Benjamin Books, Barnes and Noble),
Distributors (Ingram, Baker and Taylor) and special sales (catalogues, libraries, promotions).
The marketing and sales function for educational publishing is entirely different than trade publishing and by its nature is very political. Most educational titles
(and for all the major states) must submit to a review and selection process which pits all submitted or selected titles for each subject area (reading, math,
etc.) against each other. This process is called state adoption and occurs for each subject area on a 5-7 year rotation. Not all states are on the same
schedule; however, most selection processes for each subject fall within a 1-2 year time span. In other words, Texas and Florida may have a reading adoption
in year one and California in year two. In either of these years, the other less important states would schedule their adoptions. Additionally, the next reading
adoption in these states may not be for 5-7 years. This period represents the life cycle of subject area text books. The above three states are considered the
most important states due to their budgets and the fact that they may only select one title per subject area (whereas some other states may select a few
approved titles). Often, if a title is not selected in one or more of these states, the title may do no better than break-even. The largest players in this industry
are McGraw-Hill (School: 1-12th grade), Simon & Schuster (College), Harcourt General (HS/College) Thomson (College) and Times-Mirror (College). There
has been significant consolidation in this business in the last 5 years due to McGraw-Hill purchasing the Macmillan portion of their joint venture (1993), S&S’s
acquisition of the Macmillan College business and General Cinemas’ purchase of Harcourt Brace Jovanovich (1992).
As a result of this concentration, the risk of not gaining a number of significant adoptions has lessened as the number of players has decreased. Sales and
marketing efforts for adoption states are often regimented and state specifically what is acceptable behavior. While personnel is a significant cost in this area,
give-aways and teacher aid packages to support the text, which are provided free, generate tremendous cost and are by far the largest component of the
marketing budget. While there are a large number of states which either act on the recommendation of teachers or allow teachers to choose from an
approved list, heavy sales efforts are made to these groups and, for a publisher, acceptance by this group will mean the difference between breaking even and
significant profit. Sales reps in these sales positions are often ex-teachers and administrators and are duly familiar with the process.
Information Media Partners: Publishing Value Chain and Trends 1996 – 2000
July 15, 1996
Page 8 of 12
Prepared by Michael Cairns – Managing Partner, Information Media Partners
©Information Media Partners
In the reference area, some of the sales process in the large publishers is handled by the special sales groups who sell to libraries and universities.
Additionally, direct mail from publishers is a significant method of selling these titles (particularly directories). As the electronic component of this product
segment increases, some of the larger publishers have developed special sales groups to sell this material. Discounts to retailers follow the same pattern as
trade (without the deep discounts as the volumes are not substantial). A run-away bestseller in this category may sell only 20-30,000 copies with the average
around 15,000. Libraries typically get 20-30% discounts off retail due to the lending aspect. In this segment, sales are particularly affected by budget cuts
especially in the non-college libraries.
CHALLENGES AND ISSUES/TRENDS:
STRATEGY:
LUCRATIVE CONTRACTS WITH TOP AUTHORS ARE HIGH RISK/HIGH RETURN PROPOSITIONS. Agreements with star authors represent a barrier to entry and
a competitive advantage for the larger publishers relative to other publishers. Significant revenue for sub-rights to publish these works in foreign markets and
other formats exists and sometimes can represent the difference between a profit and a loss. Some powerful authors have withheld the right to market all
rights from their publisher (other than the right to publish in English in North America for example) in an effort to gain the potential other revenue themselves;
it remains to be seen if this will be a continuing trend. Authors (and their agents) must then take on the responsibility of marketing and selling their rights in
other markets which would not be practical unless they were as popular as a Grisham or Clancy. Big name authors are important to publishers not only for
the potential profit but also for attracting new authors, their relationships with booksellers and their command of (preferential) shelf space in stores. While
few would admit it there is also the potential “bribe” factor which allows publishers to withhold key titles from outlets (in lieu of other more cooperative
stores/wholesalers). The primary bookseller trade organization, the American Booksellers Association (ABA), polices this and other heavy handedness by
publishers.
• Related issue: Internal management reporting and information systems need to be able to analyze and report all revenues and costs to a title and author
level. Accurate income statements will enable publishers to determine the true costs of their current author agreements and the level to which they can
bargain for subsequent contracts and additional “name” authors. Frequently, income statements can not be compiled automatically which compile
revenues and costs across business units for a title or author (including sales, royalties and other income). Additional systems-related problem is the
lack of a royalty tracking system which allows them to automatically access when an author advance was paid, when additional payments are due, and
how much of the advance accrual has been paid down. (This information could help the publishers to better understand an author's performance relative
to his/her advance and subsequently improve their advance estimates on subsequent books by the same author.)
• Related issue: Pressure to earn back the large advances paid to top authors means book publishers print large quantities of these titles and flood the
channel. Issues with respect to inventory management, returns rates, obsolescence, and the value of plate all become important issues especially if the
title does not sell as expected. Additionally, if the title does not sell as expected the product life expectancy is obviously shortened and close scrutiny
should be paid to plant costs and the expected amortization rates as well as the aforementioned plate costs. In most cases the amortization rates will be
accelerated.
CHAIN BOOKSTORES AND INDEPENDENTS HAVE BECOME MORE AGGRESSIVE IN THEIR BOOK RETURN ACTIVITY. Increases in new titles and greater
organization and technology solutions at the bookstore level have resulted in a decrease in the shelf life of “untried” titles and even a reduction in shelf time
given to successful titles. The more aggressive approach to managing store inventories in recent years caught publishers off guard and led to higher than
planned levels of returns. More effective planning by both publishers and booksellers and selective title development with greater marketing support should
result in management of this problem and there has been stabilization in this area recently. Publishers have no knowledge of actual demand at the bookstore
level or even the wholesale (intermediary) level and unexpected changes in demand can catch a publisher unaware as forecasting techniques are often not
Information Media Partners: Publishing Value Chain and Trends 1996 – 2000
July 15, 1996
Page 9 of 12
Prepared by Michael Cairns – Managing Partner, Information Media Partners
©Information Media Partners
particularly sophisticated. Forecasting using point of sales data (similar to the methods used by some consumer products companies) will radically improve
the accuracy of publishing company’s forecasts; however, this will not occur in the short term. Some of the major publishing houses have created their own
proprietary forecasting software packages and these are all (to date) based on attributing prior unit sales history to the same (i.e. reprint) or similar future
titles. In addition, many publishers still maintain the traditional open return policies (it is not uncommon for a bookstore to return old dusty copies of a book
and order new ones). Perhaps publishers need to understand the effect of taking a more aggressive stance with respect to return policies.
CONTENT MANAGEMENT AND THE ESTABLISHMENT OF DIGITAL ARCHIVES OF PUBLISHED MATERIAL IS RAPIDLY BECOMING THE SECOND PHASE OF THE
DESKTOP PUBLISHING (DTP) REVOLUTION. The establishment of digital archives for all text, photos, maps, diagrams, artwork, audio, etc is of increasing
importance as on-line publishing and the opportunities for selling “chunks” of existing (traditional) products becomes daily more likely. Issues of
standardization of production software and the requirement to guard against redundancy are critical operational issues (later versions of QuarkXpress cannot
read files created in earlier versions of the “same” software) for all publishing companies. Companies are choosing a corporate wide standard (i.e.: Acrobat)
software package which will be the standard file format for their digital archive. All finished product will then be translated into this standard package from a
very limited number of acceptable software packages. This standard file format will then unify all the contents of the digital archive. Strategic issues center
around the following:
• “Back office” controls such as contract management, royalty collection and management, and copyright protections will become a significant issue as more
and more product is sold via on-line distribution and in non-traditional formats. In theory, customers will be able purchase a product in any format they
desire: an image, chapter, paragraph, drawing, diagram, book, audio sample, etc. Currently, there is no universally acceptable method or methodology
for capturing the revenue from these types of transactions and internal accounting systems (particularly royalty systems) can’t handle “chunking”.
Publishers are working on this and software developers are also developing solutions. IBM recently announced a clearinghouse system which charges
users and returns revenues to content owners (for those who sign up). In the long term, and in conjunction with their Internet presence, publishers will
need to do these themselves. IBM is also working on software which will “tag” downloaded content so that a charge or “toll” is initiated each time
material, is forwarded to an additional user. Thus, this system begins to attack the potential loss of revenues from unauthorized use. In order to
maximize the benefits from on-line access to a publisher’s material a set of coordinated policies and standards need to be enacted across the organization.
Potential customers will want one source of material and one consistent method of billing/pricing.
• On-line publishing opens up a potential worldwide market, however rights to products may preclude sales in any other but select markets (i.e.: North
America). Existing products often require a number of different royalty agreements all with different rights. For Example, rights granted for text in a
book may allow publication worldwide but the rights granted for images in the same book may only allow publication in North America. This is not an
issue for a book intended and distributed in the North American market (and publishers go to great lengths to uphold the restrictions on markets in order
to maintain the value of their sub-rights in other markets); however, online publishing does not easily allow regional or geographic restrictions. Current
revenues are small from online distribution but as they increase this channel conflict will need to be addressed.
• Some publishers, particularly journal and directory publishers will need to adapt rapidly to an environment where the traditional printed product is no
longer the acceptable method of delivery. Digital files (updated more frequently) will be required by libraries and by customers accessing the material
online.
THERE IS A POTENTIAL CHANGING PARADIGM IN JOURNAL PUBLISHING DUE TO THE ABILITY OF AUTHORS TO SELF PUBLISH THEIR RESEARCH. Journal
publishers historically represented the only reputable means for scientists and researchers to publish their works. Submissions were received by the journals,
reviewed by an editor and a peer review board and them revised and published. This process can take a year or longer. The author receives no money for
their efforts; rather, it is the prestige of being published by one of these reputable journals which they strive for. In the last few years electronic networks
have developed (accessible through the Internet) which allow scientists and researchers to publish their works without going to a publisher (i.e., Reed-
Information Media Partners: Publishing Value Chain and Trends 1996 – 2000
July 15, 1996
Page 10 of 12
Prepared by Michael Cairns – Managing Partner, Information Media Partners
©Information Media Partners
Elsevier). This process for the scientist has significant benefits: they do not have to pay to have it published (which is sometimes the case), they get fast
responses and feedback from their peer group and they can readily access up to date material for future work. Traditional publishers (like Reed-Elsevier)
have relied heavily on these scientists for material to publish their often obscure but highly profitable journals. There is a danger that their businesses may be
forced to change to match the capabilities of the Internet. Reputation and the process of publishing (reviews etc) will remain important advantages for the
existing journal publishers however timetables and price structures may need to change. While prices charged to universities and libraries may come down
dramatically, costs of production may also, as journal publishers forego print versions and merely download directly into digital (content) libraries at
universities and libraries around the world.
CHANGING MARKET REQUIREMENTS MAY REQUIRE DATABASE PUBLISHERS (I.E.: DIRECTORIES) TO SIGNIFICANTLY CHANGE THE WAY THEY DISTRIBUTE
THEIR PRODUCTS. These publishers will need to monitor carefully the changing market requirements for products to be produced in electronic versus
traditional ways. Issues relative to production, distribution and digitization of past, current and future material will exert tremendous (and possibly
insurmountable) cost pressures, and some publishers will not be able to make the transition to online publishing. In a similar situation to journal publishing,
more and more directory material is becoming available online as well as in print. Online has cost advantages for publishers as it is far cheaper (in theory) to
produce material for online distribution; however, as more of this material is available online, customers are resisting the traditionally high subscription rates.
Online access allows greater search capability allowing subscribers to get exactly what they need. As a result, they may resist the requirement that they
subscribe to the entire directory including material they will not use. Publishers may be unable to charge high subscription rates across the board and will be
required to develop a number of flexible pricing schemes. It remains to be seen what the impact will be on directory profitability. It is likely that online access
will broaden the distribution of this material and, together with cost benefits (as print versions are phased out completely) may result in increased profits.
NEW COMPETITORS ARE POSITIONED TO PROVIDE ELECTRONIC PUBLISHING. Software development companies produce and market software titles in the
same way book publishers produce and market books; where these two markets converge, there will be conflict and intense competition between traditional
and software publishing. Traditional publishers are not comfortable with selling or supporting electronic media (however all the major publishers are
significantly involved), whereas software publishers’ sales and marketing departments are full of personnel with consumer products experience and therefore
may be better able to compete. The natural market place for content based software titles (as opposed to directories and application software) is the
bookstore because the target market is similar and the environment (bookstore) is more amenable to these products. Software companies however do not
have strong distribution into these channels and in many of their content agreements with publishers they are precluded from selling into this channel. Book
publishers on the other hand are not equipped to effectively sell software in any channel. As a result, software is undersold in the book store channel. Over
the next few years, this conflict will be resolved as sales forces on both sides become more sophisticated, older content agreements are revised and
renegotiated and bookstores commit to selling computer titles.
OPERATIONS
A STRONG RELATIONSHIP BETWEEN AUTHOR AND EDITOR IS CRITICAL. Publishers need to manage the editor relationship more closely as powerful authors
have been successful in taking their editors with them when they leave a publishing house. John Grisham has hired his own editor who works for him (hired
from his publisher) and is, as a consequence, paid more in royalties by the publishing house. This trend may continue and may change the dynamic of the
publisher, editor and author relationship.
RISING DIRECT COSTS, PARTICULARLY PAPER AND MAIL COSTS HAVE SIGNIFICANTLY SQUEEZED GROSS MARGINS. Recent news reports have suggested
that costs are expected to increase 8-12% during 1996. (As of July 1996 this appears to be premature, however the risk always exists).
TECHNOLOGY:
Information Media Partners: Publishing Value Chain and Trends 1996 – 2000
July 15, 1996
Page 11 of 12
Prepared by Michael Cairns – Managing Partner, Information Media Partners
©Information Media Partners
THE TECHNOLOGICAL IMPACT OF THE INCREASING EASE OF INFORMATION COLLECTION AND DISTRIBUTION WILL INCREASE COMPETITION AMONG NON-
CREATIVE CONTENT, REQUIRING LEANER COST STRUCTURES, FASTER PRODUCT DEVELOPMENT CYCLES, AND INCREASING SPECIALIZATION. The degree to
which information is considered a commodity (i.e.: directories) will impact the traditional large monolithic professional publishers negatively unless they can
develop lean, aggressive, adaptable management and cost structures.
TRADITIONALLY, PUBLISHERS HAVE BEEN SLOW TO EMBRACE COMPUTER TECHNOLOGY AND AS A RESULT MANY PUBLISHERS COULD BENEFIT FROM MORE
EXTENSIVE COMPUTERIZED EDITORIAL AND PRODUCTION SYSTEMS. These systems can significantly reduce production and development costs. As quality
control is extremely important during the labor intensive editing process, software has been developed to increase speed and accuracy of the editing and page
make-up process. Sophisticated unified software solutions including publishing control and management systems (including version control) will continue to
impact the publishing production process.
• Related issue: Back office financial and order management software is often old and of antiquated architecture. Unified software solutions do not exist
and current systems are a patch work of solutions developed over (often) the last 20 years.
PUBLISHERS HAVE BEGUN TO EXPERIMENT WITH “ON-DEMAND” PRODUCTION OF TEXT BOOKS. Under this program, teachers and professors have the ability
to request particular chapters for text books they want to use in their classrooms. The request is submitted to the university bookstore which then produces
and binds it for sale to students. This format is becoming increasingly popular and impacts inventory management, demand planning and royalty accounting.
While this is mainly a custom packaging exercise, it is a precursor to distribution on demand to university networks and digital libraries which will allow
students to access text (predetermined by instructors) on-line.
ADDITIONAL DISBURSEMENT OF CORE PUBLISHING STAFF WILL CONTINUE. Establishment of sophisticated communication systems (Lotus Notes, etc)
leading to the ability to place core publishing staff (editors, production staff, designers) outside metropolitan areas (New York) as back office operations have
been for many years. A result could be a major decrease in factor costs.
ELECTRONIC ORDERING WILL STEADILY INCREASE AS THE METHOD OF ORDERING PRODUCTS FOR ALL WHOLESALERS, DISTRIBUTORS, AND BOOKSTORES.
Publishers had been slow to utilize EDI and other electronic order methods, however due to an Association of American Publishers (AAP) led initiative, over 70
publishers are electronically linked to over 3,000 bookstores through the AAP PubNet system. Rapid turn around and greater accuracy have been benefits of
this technology and these were selling points historically offered by wholesalers. Together with better discounts offered to bookstores by publishers than by
wholesalers to bookstores, there may be an increase in more direct to bookstore orders fulfilled by publishers than has been the case in the past. Publishers
would like to broaden their distribution (particularly to independent bookstores) to balance the distribution to large wholesalers and chain bookstores.
TRENDS:
CONSOLIDATION IN PUBLISHING WILL CONTINUE. Large publishers have consolidated over the past 15-20 years particularly in trade and educational
publishing. This trend will continue as publishers continue to recognize the validity of increasing their back lists and utilizing excess capacity in their back
office and sales and marketing operations.
THE TRANSFER OF POWER TO LARGE CHAIN RETAILERS SQUEEZES MARGINS AND REQUIRES STREAMLINED OPERATIONS. As publishing fulfillment
operations have become more efficient, publishers have been able to offer better discounts to smaller publishers which in turn have squeezed the margins of
the middle market wholesalers. Ingram and Baker and Taylor the largest wholesalers will not be impacted however, there may be consolidation in the middle
market wholesale business as more publishers deal directly with bookstores.
Information Media Partners: Publishing Value Chain and Trends 1996 – 2000
July 15, 1996
Page 12 of 12
Prepared by Michael Cairns – Managing Partner, Information Media Partners
©Information Media Partners
• Related issue: Publishers are increasingly seeking customer and sales information from channel intermediaries, who also wield power with retailers for
shelf space and information.
MANY PUBLISHERS HAVE ESTABLISHED HOME PAGES ON THE INTERNET (WWW). Publishers experimented with computer software publishing in the mid
1980s and universally failed. Recently, some publishers have backed off their investments in multimedia (Harper Collins & Penguin) as development costs
escalated and back end support was underestimated. It remains to be seen how Internet use by publishers will develop (most publishers appear committed to
the medium). Most web sites currently allow the purchase of books (volume is low), access to reviews, and other marketing related materials. Some
publishers (in contrast to the above) have entered joint multimedia development programs (Random House), whereby the publisher contributes content and
the software developer the software know-how and software marketing expertise. To date (with the exception of games manufacturers) distinctive new
publishing products for the electronic medium have been slow to develop.
• Related issue: Blurring lines between content of information, education and entertainment products and converging publishing formats create new
product and licensing opportunities as well as more challenging market positioning strategies.
ELECTRONIC PUBLISHERS AND TRADITIONAL PUBLISHERS MAY SPAWN THE NEXT WAVE OF MERGERS AND ACQUISITIONS IN THE PUBLISHING INDUSTRY.
With significant cash flow, healthy balance sheets and strong growth prospects it is conceivable that an existing electronic publishing company may seek to
purchase one of the larger traditional publishing companies. Such acquisitions would provide access to content, development skill and distribution.
THE EMERGENCE OF WHOLESALE DISCOUNT CLUBS (SAM’S, WALMART) AND “SUPERSTORES” (WALDEN BOOKS, BARNES & NOBLE) HAS SIGNIFICANTLY
CHANGED THE ECONOMICS OF PUBLISHING. There has been a significant shift toward high-volume sales and a consequent shift in power to these large
purchasers of books. As a result, publishers are beholden to these buyers not only for the revenue effect but also for the economies of scale their products
generate. There has been a significant expansion of the consumer book market due to these new outlets, but it is debatable whether these large customers
have exercised their potential power over publishers to a disproportionate degree
ALTERNATIVE NON-BOOK PRODUCTS (CD-ROM, ONLINE VERSIONS) WILL EXPERIENCE LESS “WEAR AND TEAR,” Publishers have generated significant
“repeat buys” of traditional printed products to libraries etc. simply because the product was worn out; non-book products may have a longer physical life.
This trend may lead to more products being “updated” with a new chapter or foreword etc in order to induce the customer to repurchase the “newer” product.
PUBLISHERS WILL OUTSOURCE MORE OF THEIR NON-CORE OPERATIONS. Houghton Mifflin recently outsourced their distribution operations (to Ingram’s PRI)
and despite initial problems executives view it as a success and anticipate that other publishers will consider outsourcing. Other publishers have outsourced
elements of their finance function and it is clear that other reengineering and outsourcing opportunities exist at most major publishers.